Coronavirus Impact

During the last four weeks, global equity markets have been rattled by the Coronavirus outbreak, which has intensified over the last few days.  The recent drop could be a simple knee jerk reaction or the start of a more volatile period for investors.  Markets hate uncertainty and the outcome of a potential global pandemic is clearly unpredictable.

It is too early to draw any conclusions but the recent drop in equity markets certainly feels like an over-reaction.  China is home to nearly 1.4 billion people and recorded cases of the virus stand at around 79,000, approximately 0.006% of the population.  Though the spread of the virus beyond China is worrying.

There have been 12 epidemics since 1994, none of which have materially affected the global economy.  Certain sectors and economies experienced some short-term pain but soon recovered.  However, we acknowledge that the global response to the illness is different this time.  Large scale lockdowns slow the spread of the virus, but domestic and global supply chains breakdown.  Consequently, corporate revenues will be under pressure.  Also, China plays a much larger role in the global economy now and its preventative action is likely to be felt more widely.

That said, containment measures should be welcomed.  The spread of the virus in China has slowed considerably.  A highly regarded Chinese respiratory specialist, Zhong Nanshan, shared his confidence that the outbreak in China will be under control by the end of April.

Investors are likely to benefit from Government intervention if the virus significantly impacts global growth.  China has already introduced a stimulus package to help support their economy and the US has indicated that a ‘material reassessment of the outlook’ may be required.  The Bank of England is likely to follow, along with the European Central Bank.

In summary, if the damage to the global economy is relatively mild, we would expect a sharp recovery in equities.  However, if the consequences of the outbreak are considerably painful, volatility will continue, but equity prices are likely to find some support from Global Government and Central Bank fiscal and monetary policy.

Our investors typically hold mixed investment strategies, which include lower risk safe haven components.  As a result, our investors have been shielded from the worst of the recent volatility, but valuations have fallen into negative territory year to date.   The FTSE 100 has fallen by around 9% so far this year, but even our most adventurous strategy has only fallen by around 4%.  Our cautious strategy, which tends to be most popular amongst our clients, has only fallen by around 2% so far in 2020.

Our recommendation is to hold your position.  This is the most common solution and usually the most sensible.  The level of risk being taken was appropriate for your circumstances and objectives at the time of your last review.  There will be times when we suffer setbacks, slow periods and times when we witness more attractive results.  The ‘hold’ strategy has historically produced the highest long-term gain, but investors should try to ignore the day to day volatility, which is easier said than done.

Alternatively, for those with concerns, we can move some or all of their investments to cash or other lower-risk assets.  This would provide some safety but, trying to time when to re-enter the market requires a large element of good fortune.

Evidence suggests that investor’s attempting to ‘time’ the market ultimately achieve lower returns.  Those that do enjoy better results are often lucky, rather than skilful.

Finally, some may consider the recent fall in equities as a buying opportunity.   There is clearly no way of knowing, but please get in touch if you wish to discuss adjusting your existing portfolio or if you wish to invest more.

As always, we are here to help.  If you have any concerns, please get in touch.